There are advertisements all over media that make claims about the settlement of tax debts that taxpayers need to pay to the IRS. The particular settlement program is known as Offer In Compromise. However, the fact that a vast majority of Offer in Compromise applications are rejected is something that you should be made aware of.
In a report made by the Government Accountability Office, there were 16 million people with tax debts as of 2010. Only 31,000 Offer in Compromise applications were approved during that time, while approved Installment Agreements reached 4 million.
The acceptance rate for Offer in Compromise is low because of two main reasons.
- Many taxpayers apply but do not fulfill the base qualifications for Offer In Compromise.
- The taxpayers who do qualify are unable to pay the amount they offer.
Do you Qualify for Offer in Compromise?
The IRS’s essential criteria to determine the acceptance of an application for Offer in Compromise is the taxpayer’s ability to pay their tax debt. There is a tool on the IRS website known as the OIC Pre-Qualifier that can help you get a basic idea of your acceptance eligibility.
The basic idea to qualify for an OIC is for a client to prove their inability to pay the total tax debt before the collection statute expiration. This is done by viewing the net equity of assets along with any future income. Monthly disposable income is basically what the IRS uses to calculate future income to determine whether a tax debt can be paid before the collection statute expiration.
If the final calculation determines the inability to pay your tax debt, you are considered eligible for Offer in Compromise.
You should know that eligibility does not equal acceptance. You must be able to pay the offer amount computed by the IRS for your application of Offer in Compromise to be accepted and the debt to be settled.
Can you Pay the Offer in Compromise Amount?
There is a formula used to objectively determine whether you can pay the amount proposed in the Offer In Compromise. The procedure requires an estimate of your future income for 1-2 years.
Due diligence is necessary for calculations of the offer amount. Sometimes, people who have a tax debt overestimate or underestimate this amount in their calculations. They need to correctly calculate their disposable income for each month and the net equity in their assets. Due diligence is also essential to avoid what may become a lengthy and costly investigation process.
2011 Fresh Start Initiative by the IRS
The number of qualifications and acceptance of Offer In Compromise has been rising since 2011. The reason being the Fresh Start Initiative, which has made it easier to qualify for Offer in Compromise. The 2011 initiative also enabled the people who owe taxes to pay a lesser offer amount.
Before introducing the initiative, offer amounts for tax debt settlement were considerably higher than they are today. Before the initiative, future income would be summed up for four years instead of the 1-2 years that is now calculated since the Fresh Start Initiative.
There was a 30% increase in applications for Offer in Compromise after the introduction of Fresh Start, while the IRS’ acceptance rate has increased from 25% to 42%.
Conclusion
The Offer in Compromise should only be considered when your financial situation is poor enough to hinder your ability to pay the total tax debt until the collection statute expiration. The criteria for qualification and acceptance of an Offer in Compromise application is quite evident to decide between pursuing an Offer in Compromise or not.
The difficult task is the calculations and estimations involved in computing the ability to pay and the net equity in assets. It would be best if you looked closely into the feasibility of the Offer in Compromise in regards to your financial situation. Sometimes, there are suitable alternatives to Offer in Compromises such as a Partial Pay Installment Agreement or a Currently Non Collectible Status.
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